Eating a deductible is breaking the law! Do you need help finding a reputable contractor?

While some of us have been busy filling our down time from a deployment by playing Grand Theft Auto V online, watching the Breaking Bad Finale or being irritated by all of the media surrounding the Government Shutdown... Lets focus on a ethical hot topic that will have many contractors screaming in protest!  Ignoring deductibles!  This is a serious issue that could land the homeowner and contractor in jail and with some hefty DOI fines! (Department of Insurance)  As an adjuster, it is important to be aware of this moral dilemma; because roughly 85% of all contractors are going to do this! (that's almost 9 out of 10 contractors)

By law, insureds are required to fiscally participate in a loss with the insurance company.  This is why there are deductibles; and this is why everyone is required to pay a deductible to the insurance company whenever a loss is suffered.

"Eating a deductible" means that a contractor will attempt to negotiate with your insurance company so you do not have to pay your deductible on your claim.  Your contractor may make this sound like a good deal; but the problem with this is that "eating a deductible" is classified as insurance fraud.  In order for a contractor to do this, they would need to either: screw you over when you try to claim your RCBs (recoverable depreciation) or double invoice your insurance company.  Double invoicing means that they will give the insured (you) an invoice for "xxx" dollar amount, while submitting a different invoice to the insurance company for a higher dollar amount.  This higher dollar amount will conveniently be in the amount of your specific deductible.  In other terms, your contractor is purposely lying to the insurance company!  Once you (the insured/homeowner) have been made aware that your contractor is doing this, then you can be held liable as well!

Lets take a look at how most state laws will define insurance fraud.

This is the current Indiana insurance law which will hold true and be consistent with most states.  Visit your local government facility to obtain the exact insurance law in your area.

INDIANA CODE 35-43-5-4.5

A person who knowingly and with intent to defraud:

(1) makes, utters, presents or causes to be presented to an insurer or insurance claimant, a claim statement that contains, false, incomplete, or misleading information concerning the claim.

(2) presents, causes to be presented, or prepares with knowledge or belief that it will be presented to or by an insurer, an oral, a written, or an electronic statement that the person knows to contain materially false information.


There ya' have it.... That is insurance fraud!  Not a whole lot of room for grey area is there?  If you and/or your contractor are found guilty of this, then you will have performed a Class C Felony!  Once you commit a felony, you can no longer vote or purchase/carry a firearm.  You will also face jail time and hefty penalties.

Now the question is... "Is my contractor doing this?"  Unfortunately the answer is most likely, "Yes!"  Most contractors are unaware that eating a deductible is insurance fraud; therefore most are going to openly advertise that they will do the job so you don't have to pay for your deductible...  The competition is fierce out there!  Especially after a new storm hits!  Almost all contracting companies are going to feel inclined to offer "eating a deductible" to you because otherwise they don't feel like they can compete in the market.  They can be a little sneaky with how they present this to you.  They may also try to pressure you!  You may have heard this before:

• I'll just do the job for "xxx" amount less than what the insurance company pays you.  That way you don't have to worry about paying for your deductible.


• I'll give you "xxx" amount off of your total job cost as an advertisement discount; but only if you let me put my sign in your yard!


• I don't need "xxx" amount that the insurance company paid you to do your job...  I'm a lot cheaper than the competition.  If you decide to use me today I can do your job for less and you can keep the extra money!

There are other problems that can also arise from "eating deductibles."  Unless you live in a state that is RCV only (i.e. West Virginia) your insurance company is only going to give you a portion of your settlement up front.  This is called Actual Cash Value or ACV.  Without going into huge details, ACV payments are best described as "ransom money!"  The insurance company doesn't want to overpay for your claim so they want to make sure you are going to actually do the work for the amount that has been settled/agreed upon.  Your insurance company is going to ask for a contract or invoice from your contractor.  They basically want to make sure you are legally contracted to complete the work before they release the rest of your settlement to you.  If the insurance company receives an invoice from your contractor that is "xxx" less than the total claim settlement amount (assuming your contractor is not double invoicing and submits the invoice amount that he/she is actually charging you), then the insurance company is only going to pay you the costs you have incurred, less your deductible.  In other words, you are getting a crappier roof than you deserve because you will still end up paying for your deductible!

I can guarantee you if your contractor is willing to cheat your insurance company, then they are going to cheat you too!  It may come in the form of your deductible, but your contractor is going to "cut corners" elsewhere so they can still make some sort of profit on your job.  You will get a lesser quality roof if you go with a contractor who is doing the job for your deductible!

"IF YOU ARE A CONTRACTOR WHO IS KNOWINGLY DOING THIS TO YOUR CUSTOMERS..... SHAME ON YOU!"

Guaranteed SECRET way to get the Insurance Adjuster to pay for anything!

There isn't!  Everything is handled on a claim by claim basis.  It is based on an insurance adjuster's discretion and insurance carrier policy.  No two claims are alike.  So whenever you hear a contractor complain "You guys paid for this on another claim".  That's why...  Contracting and insurance adjusting are both very inconsistent industries.  Keep this in mind if you are creating estimates to send to the insurance companies for supplement approval.  The best way to get everything you are asking for is to ALWAYS act professional, kind, courteous and be fair.  The same can be said for the insurance adjuster.

I know many contractors who will ask for a full roof replacement, non-existing drip edge/gutter apron, the homeowner's air conditioner with the dog house roof and overhead & profit (O&P) all marked up to $45,000.00 for a 20 square, 3-tab roof.  These same contractors will act like stubborn 2 year olds when they don't get their way.  If you are going to ask for everything under the sun, then you need to act like a professional/reasonable person.

To O&P or not to O&P...

That is the question...

O&P stands for overhead and profit and is usually included into an insurance claim when a job warrants extra work/coordination of sub crews from a general contractor.  It is extra money allowance of 10% overhead and 10% profit added to the overall claim settlement amount (20% total).  The definition of overhead and profit inclusion is "Complexity of repairs or coordination of multiple trades".  There is a lot of controversy surrounding what warrants O&P into an insurance claim.  Arguments can easily be made on both sides of the fence.  But it all comes down to how well the insurance adjuster can justify O&P inclusion into his or her file notes.

Once upon a time, insurance companies used to automatically include O&P into a job when 3 or more different trades were present in the claim.  For example, if the roof was being replaced along with: an elevation of siding and interior drywall/paint repairs, then this job would quality for O&P for multiple trades (because there would be a total of 4 different trades in this example).  This type of job is also complex (as some of the trades are contingent upon each other), which is also another reason why O&P would be warranted.  However, it only takes a few bad eggs to spoil the batch for everyone... What insurance companies were finding is that some general contractors would purposely hire additional sub crews to perform miniscule/unnecessary tasks (such as hiring an HVAC tech solely to unhook the furnace cap during a roof replacement) or hiring a window installer to replace an exterior window screen, just so they could bill the insurance company for O&P.  It is for this reason, that most insurance companies will look for "complexity of repairs" as another area to consider O&P.

So how could an adjuster justify coordination of multiple trades properly in his or her file notes?  You could take the approach of:

"Overhead and profit is warranted on this job due to coordination of multiple trades and complexity of repairs.  This job has complexity due to the need to coordinate between the roofing, siding, drywall and painting subcontractors and the homeowner.  The painter cannot begin his work until the drywall subcontractor has finished his work and the mud is dry.  The drywall subcontractor cannot begin his work until the roofing subcontractor is finished with his work and the roof stops leaking.  All of this has to be coordinated with the homeowner’s schedule, as interior access will be necessary to complete the repairs; thus adding complexity to the job."

Feel free to paraphrase, but if you want to sound like a smarty pants and get management off of your back about your settlement decisions, then this example would be a good place to start in how you should structure your logic within a file note.  Of course your photographs should also support justification of overhead and profit as well.

What should I do if I am not sure if a claim warrants overhead and profit?

You should review any settlement/coverage questions with your manager.  But if your manager is not available and you are out in the field ready to make an on-site settlement then INCLUDE IT!  If you are on the fence and there is any question in your mind at all about including O&P into a claim; then just include it!

You are more likely to get in trouble for not paying O&P when it should have been warranted, than vice-versa.  There is an old saying that one of my old managers loved to throw around at the office "The tie goes to the runner!"  It is just good customer service to include O&P as much as you can justify it.  This will make the contractor happy, and in turn will make the homeowner happy; because that is just one less step that the homeowner will have to deal with.  Homeowners HATE having to ask the insurance company for supplemental payments!  The same cannot be said for the contractor ;)

Also think of it this way.  If overhead and profit is included in the claim that you are adjusting, then you have a greater chance for the claim to reach eligibility for percentage file billing.  Which is more money in your pocket!  Everyone loves more money! It's a win-win situation!  Just be sure you are not going crazy with it and that you can reasonably justify your thought process within your file notes.  Un-ethical billing on your files can lead to a quick release from the storm and a probable DNR or (do not rehire) black-listed to your employment.